Trading account

Trading account is a statement which is prepared by a business firm. It shows the gross profit of business activities during a specific period. It is a part of the final accounts of the entity. In other words, the trading account gives details of total sales, total purchases and direct expenses relating to purchase and sales. Trading account format for the year contains Particulars, Amount, Dr., Cr., Purchases, Sales, etc. In this article, we will see the advantages of a Trading account and Trading account format.

Trading Account

Trading and manufacturing business firms deal in sales and purchases of goods. Therefore, only manufacturing and trading entities prepare the trading account. Service providers do not prepare this.

Advantages of Preparing Trading Account Format

• It is a very important statement from the cost point of view of the goods. By preparing the Trading account entities can take the decision for continuing or discontinuing a particular product. It helps to earn the maximum profit or reduce the losses.
• With the help of a trading account, Sales tax authorities can easily see the correct purchases and correct sales as per the sales tax return submitted by a business firm.

• It also helps the Excise authorities to assess the excise duties of business firms.
• The management decides the price of the product with the help of a trading account, after keeping in mind the market competition.

Understand the Concept of Profit and Loss Account here in detail.

Items in Trading Account Format

Trading Account contains the following details

• Opening stock details of raw material, semi-finished goods and finished goods.
• Closing stock details of raw material, semi-finished goods, and finished goods.
• Total purchases of goods fewer Purchase Returns.
• Total sales of goods fewer Sales Returns.
• All direct expenses related to purchases or sales or manufacturing of goods.

Items of Income (Cr.) side

• Total sales of goods fewer Sales returns
• Closing stock of goods.

Items of expenditure (Dr.) Side

• Opening stock of goods
• Total purchases of goods Less purchase returns
• All direct expenses like Carriage inward & Freight expenses, Rent for godown or factory, Electricity and Power expenses, wages of workers and supervisors, Packing expenses, etc.

Notes

1. The Trial balance never shows the Closing stock. However, firstly, we need to show the amount of closing stock on the income side of Trading account and secondly, in the balance sheet under current asset.
2. We value the closing stock at cost or market price, whichever is less.
3. On the date of preparation of trading account, we value the Closing stock which is physically available.
4. However, we can prepare the Trading account in horizontal form also but the contents shall remain the same.

Trading Account Format

Particulars	Amount	Particulars	Amount
To opening stock		By sales
To purchase		Less: Returns
Less: returns		By Closing stock
To direct expenses:
Freight & carriage
Custom & insurance
Wages
Gas, water & fuel
Factory expenses
Royalty on production
To Gross profit c/d

Solved Example For You

Prepare a trading account for the year ending March 31, 2016, from the following particulars:

Particulars	Amount	Particulars	Amount
Stock (April 1, 2015)	20,000	Octroi duty	75
Cash purchases	30,000	Drawings in goods by the proprietor	500
Credit purchases	20,000	Expenses of taking delivery	25
Purchases returns	1,000	Goods are given as charity	100
Cash sales	40,000	Carriage inward	1,450
Credit sales	30,000	Goods are given in samples free of charge	100
Loss of goods by fire	1,500	Goods sent on consignment at cost	1,500
Wages	400	Rent and taxes	500
Returns inwards	2,000	Discount	200
Commission on purchase	100	Commission	400
Closing stock	3,500	Travelling exp.	700

 

Ans:

                                                                      Trading Account

                                             (For the year ending 31^st March 2016)

 

Particulars		Amount	Particulars		Amount
To opening stock		20,000	By Goods sent on consignment a/c		1,500
To purchase			By sales
Cash purchase     30,000	30000		Cash sales	40000
Credit purchase   20,000	20000		Credit sales	35000
Less: Return outward 1,000	(1000)		Less: Return inward	(2000)	68000
Drawings 500	(500)
Goods as charity 100	(100)
Goods as sample 100	(100)	48300
To carriage inward		1,450	By P&L A/c (Loss by fire)		1,500
To wages		400	By closing stock		3,500
To commission on purchases		100
To Octroi duty		75
To Expenses of taking delivery		25
To Gross profit transferred to P.&LA/c		4,150
		74,500			74,500